Cover-Your-Tail (C.Y.T.): Claims-Made Coverage,
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"I just heard that the firm I left two years ago is blowing up. I'm going to be insured for the work that I did there, right?" — Anonymous laterally-hired attorney.
Generally speaking, lawyers don't tend to spend lots of time on malpractice insurance issues, given that they tend to be focused on arguably higher-priority items – like "lawyering." Two of the questions that lawyers don't seem to ask themselves often enough (especially in this age, where attorneys switch firms much more often than they used to) are actually pretty fundamental:
- "What can I do to make sure I have insurance now for the growing body of legal work I've done at my current and former law firms?"
- "What can I do now to make sure I'll be covered down the road for claims that might be made against me arising from work I've done up until now?"
Since the concept of "claims-made coverage" as it applies to professional liability insurance isn't necessarily universally understood in the legal profession, we should start with a couple of definitions to set the stage:
Claims-Made Coverage is insurance that covers claims made against you during the policy period for acts you may have committed in the past. If you had coverage when you did the work, but don't have a policy in place if and when you get sued, you don't have coverage. Period.
Occurrence Coverage is insurance that covers you for claims made against you in the future for acts you may have committed during the policy period. Professional Liability insurance for lawyers is not currently available in this country on an "occurrence" basis. The closest thing available is exercising Extended Reporting Period (ERP, or "Tail") rights under your claims-made policy, but since that would be very expensive to do every year, and since some policies offer ERP rights of as little as of one year, this is not a practical solution.
Scenario 1: Prior Acts: Insurance and The Lateral Attorney
Once upon a time, there was a law firm that started losing attorneys in droves. In three years, the firm went from 300 attorneys to 30. The last 30 folks, not being particularly interested in having to shell out the money to buy a tail for a 300 attorney law firm, arranged for tail coverage only for themselves, excluding even their own vicarious liability for the acts committed by their 270 former colleagues.
Question: So what about those 270 former colleagues? Were they able to make their own arrangements for their tail exposure? Or did some of them go on blissfully unaware that this was even an issue – that they themselves could be personally liable for claims arising out of work they did for the now-defunct law firm?
The answer was both: Some of the attorneys ended up with firms that had automatic coverage for their lateral hires for work they did prior to joining those new firms (sometimes known as "blanket lateral hire past acts coverage"); some attorneys asked their new firms to negotiate terms to include coverage specifically for them at the prior firm; and, of course, some probably ended up uninsured. However, this case raises an important issue: how many attorneys are in contact with their former firms to verify that they continue to be covered for work they did for them? Sure, as long as your former firm continues to buy claims-made coverage every year, you should continue to be insured for your work there, but sometimes firms dissolve, and sometimes firms are unable or unwilling to buy insurance, so there's no guarantee that coverage continues to exist for you.
Scenario 2: Why Your Current Law Firm Might Not Be Keen to Pick Up Your Tail Exposure From Your Prior Firm(s)
In 1990, a law firm dissolved, and the partners were cast to the four winds. Two of those partners ended up with a firm whose policy contained coverage for the acts of lateral hires committed prior to those laterals joining the firm. Lo and behold, the former firm had a multi-million dollar Savings & Loan claim and, as everyone involved looked around to find coverage, the only available insurance was from those two partners under their new firm's policy – neither partner was involved in the actual work for the S&L, by the way. Although the new firm's policy limit wasn't completely wiped out, it was severely depleted by the S&L claim, and of course they had a seven-figure claim to deal with at the negotiation of their next renewal - all as a result of a claim arising from work for which the new firm derived no economic benefit, and over which the new firm exercised no quality control.
Question: Is a firm exercising its fiduciary responsibility to its partners by exposing the firm's insurance limits to claims resulting from work done outside of the firm?
What to do about your own exposure arising from your prior law firm(s):
- Touch base with your former firm(s) to make sure that they are still buying insurance, and that you're still covered there. If a former firm is dissolving or is being acquired, try and find out what they intend to do regarding ERP coverage – decisions are being made that affect you and your exposure, and you should know what those decisions are, even if they don't give you any say in them.
- If your former firm isn't buying insurance any more, or it dissolved and didn't buy a tail, check and see whether your current firm's policy is covering you for work you did at prior firms on the afore-mentioned "blanket" basis. If not, and if your current firm is open to doing it, it might be possible for you to arrange for such coverage to be added to your current firm's policy, though there would likely be a charge for it, and it would likely exclude your vicarious liability for claims against your former firm.
Scenario 3: Why Insurance Companies Don't Want To Write Your Coverage On An Occurrence Basis – and Why You Wish They Would.
A few years back, a firm reported a claim to me involving a will that one of their attorneys had drafted for a client. The client had recently passed on, and now the heirs were squabbling over the estate. In the course of that squabbling, they alleged that there had been a flaw in the will when it was originally drafted – which was in 1972. Now, Professional Liability hasn't always been written on a Claims-Made basis, so, in addition to reporting the matter to their current insurers, I suggested the firm dig out their policy from 1972 to see if there might be occurrence coverage there in addition to their current Claims-Made coverage. Indeed, there was.
Questions: Do you think the insurer from 1972 had counted their profits from that year by now? How likely is it that they had set aside a realistic amount of money in 1972 to cover claims from 30 years down the road? What would happen if the same will were drafted today? Would there be coverage for the claim 30 years down the road?
That leads us to a discussion of the ERP rights you have under your policy. The basic conflict here is that insurance companies want to know if they made money on a policy, and they want to know reasonably soon after the end of the policy year; you, on the other hand, want to be covered for as long as possible. Thus, you will want to pursue coverage with the longest and broadest available commitments from the insurer, and they on the other hand, will want to limit their commitments to you to the shortest possible amount of time. Note that, in analyzing the tail issue, especially when considering competing policy forms at renewal, you should be very careful about accepting a narrower policy wording just because it might offer you longer ERP rights if and when you choose to invoke them: for example, would you trade rights to a longer tail period for a Conflict of Interest exclusion in a policy? Professional Liability policies are in no way standardized, so you will need to pay careful attention to what's actually in them.
What to look for in the ERP rights under your policy:
- How long are the tail options offered? Many offer options of five or six years – or even for an unlimited period (which is the closest you'll come to occurrence coverage). Conversely, it seems that the larger a firm is, the shorter the tail rights are under the policy, and many larger firms buy policies with rights that are limited to one or two years. Also, understand that, although the rights you have under your policy are important, you're not precluded from negotiating other solutions that might be more cost-effective, including standalone tail policies (rare, but possible) and rolling your exposure into your new firm's insurance.
- Are there options for attorneys retiring from the practice of law? Although they arguably won't need it until and unless the firm stops buying coverage, some retiring attorneys find comfort in the fact that they can lock in tail coverage if they decide to retire from the practice of law – independent of whether the firm itself decides to buy tail coverage.
- Does the policy limit reinstate when the tail rights are exercised?
- How strongly rated is your insurer financially?
If you're potentially going to be asking an insurer to make a long-term tail commitment, how likely they are to be around in 10 years or so is an important factor. An interesting fact to consider is that, faced with the decision of exercising their full ERP rights under the policy (typically in a dissolution or an acquisition of their firm), firms often don't. One insurance company, in presenting a case for no longer offering unlimited-period tail rights under their policy, pointed to their own stats, which showed that dissolving firms only took advantage of the unlimited-period option in about half of those cases. My own experience is similar: firms, when faced with the cost of exercising a tail, often look at ways of controlling that cost – shorter periods, lower limits, etc. Also, in those situations where, say, a dissolving firm buys a limited period tail (three years, for example), they're usually not interested in negotiating the purchase of more tail coverage when that three years runs out (and, yes, that sort of thing can in fact be negotiated).In short, firms and attorneys take educated risks, which is important because there is no perfect solution to this issue. Just as with regular insurance, you could exercise a tail, and then have a lawsuit that is excluded under the policy language. Or you could have your policy limit wiped out by a big claim or two, and then be unable to buy replacement coverage for that next claim. So you have to weigh the pros and cons, and the economic trade-offs, of the options available to you, before you decide what to do. Before you can make those decisions, though, you have to start asking the right questions: the first part of taking educated risks is the "education" part.
Daniel Klauss is a vice president with Aon Law Firm Solutions, Aon's Affinity Insurance Services, Inc. mid-sized law firms initiative. Dan has served as an instructor for the Insurance Institute of Canada, and has spoken on the topic of policy coverage issues at the ABA Standing Committee on Lawyers Professional Liability, as well as at the national conference of the Association of Legal Administrators.